Investors sweat on Fortescue update to costs drive

The West Australian

Thursday, 16 July 2009 10:06PM

Fortescue Metals Group will today be asked by investors to detail progress of its $400 million cost-cutting initiative amid expectations the Pilbara producer will suffer a 33 per cent cut to iron ore prices this year.

The Andrew Forrest-led miner is due to publish its second-quarter report this morning, making it the first of the major Pilbara producers to give a detailed update to investors on Chinese iron ore demand in the past three months.

Although Fortescue's immediate financial woes have been sorted following a $644.8 million cash injection from Chinese group Hunan Valin Iron and Steel in April, investors are hoping the indebted miner has been able to improve its operational performance in the past quarter to cut cash costs.

Problems at the Cloudbreak mine, in particular its ability to deal with wet ore, have resulted in Fortescue's operating costs blowing out to levels far above the miner's internal targets, in turn putting a squeeze on already tight cash flows at a time when customer demand for the steel-making commodity has also slumped.

A cut in the miner's operating costs is even more crucial given the increasing likelihood that China's steel mills will agree to a 33 per cent cut to Pilbara fines product this year, further reducing Fortescue's cash inflows.

Fortescue is targeting annualised savings of $400 million from its across-the-company cost-cutting initiative.

Fortescue is not part of the annual pricing negotiations, instead accepting whatever price Rio Tinto and BHP Billiton strike.

Fortescue, which sells all of its product to China, has already started providing for a lower sales price ahead of a formal benchmark being struck.

Fortescue shares have enjoyed a re-rating over the past two months to trade comfortably above $3. At the start of the year the stock fell below $1.70.